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Hudson City Bancorp Inc. (HCBK - Analyst Report) reported third-quarter 2013 operating earnings of 9 cents per share, in line with the Zacks Consensus Estimate. However, this compares unfavorably with the prior-year quarter figure of 11 cents.

Quarterly results at Hudson City mainly came on the back of increased non-interest income and lower provision for loan losses. Further, decreased expenses and a strong capital position were the tailwinds for the quarter. However, a decline in the top line due to lower net interest income was a negative.

Hudson City’s net income for the quarter came in at $42.7 million, compared with $55.9 million in the prior-year quarter.

Quarter in Detail

Hudson City’s total revenue was $152.9 million, down 25.9% from the year-ago quarter. Further, revenues were lower than the Zacks Consensus Estimate of $154.0 million.

Hudson City’s net interest income decreased 31.4% year over year to $139.4 million. The fall was mainly due to the overall decline in the average balance of interest-earning assets and interest-bearing liabilities and the persistent low interest rate environment. Net interest margin came in at 1.48%, down from 2.02% in the year-ago quarter.

Non-interest income came in at $13.5 million, substantially up on a year-over-year basis. Reported quarter results included $10.6 million gain on the sale of mortgage-backed securities. There were no securities sales for the prior-year quarter.

Total non-interest expense waned 16.4% from the prior-year quarter to $78.5 million. The decline was primarily due to decreases in federal deposit insurance expense and other non-interest expense, partially offset by a rise in compensation and benefits.

The efficiency ratio deteriorated to 51.34% from 45.50% in the year-ago quarter. An increase in the efficiency ratio indicates a decline in profitability.

Credit Quality

Credit metrics improved in the reported quarter. Nonperforming loans reached $1.07 billion as of Sep 30, 2013, down 6.1% year over year. Provisions for loan losses amounted to $4.0 million, down 80.0% on a year-over-year basis. The decrease was primarily due to a fall in total delinquent loans and total loans.

Net charge-offs stood at $10.3 million, down 36.8% year over year. The ratio of net charge-offs to average loans came in at 0.17%, down from 0.24% in the prior-year quarter. Nonperforming assets decreased 4.2% year over year to $1.14 billion.

Capital Ratios

Hudson City’s capital ratios remained strong during the quarter. The bank’s Tier 1 leverage capital ratio advanced to 10.57% as of Sep 30, 2013 from 9.75% as of Sep 30, 2012. Equity to total assets was 11.97%, compared with 11.25% as of Sep 30, 2012.

Total risk-based capital ratio was 24.40%, up from 21.02% in the year-ago quarter.

Dividend Update

Concurrent with the earnings release, Hudson City declared a quarterly cash dividend of 4 cents per share. The dividend will be paid on Nov 29, 2013 to shareholders of record on Nov 8.

Our Viewpoint

An unfavorable interest-rate environment, sluggish economic recovery and uncertainty surrounding the new and anticipated regulations are likely to be headwinds for Hudson City. However, in Aug 2012, M&T Bank Corp. (MTB - Analyst Report) agreed to take over Hudson City in a cash-and-stock deal.

Later on, in Apr 2013, the Federal Reserve detected several loopholes in M&T Bank's efforts to fight money laundering and put a hold on the acquisition. Nevertheless, in Jun 2013, the bank successfully reached an agreement with the Fed to improve compliance with respect to risky activities. Hence, the merger has managed to overcome all regulation hurdles and is expected to be completed in the near term.

Despite the restructuring in Hudson City’s business model, amid a low interest-rate environment, the company was encountering challenges in its growth trajectory.  Although it announced some initiatives to diversify in 2012, it did not have adequate flexibility with respect to its balance sheet. Hence, the above-mentioned deal was a strategic fit for Hudson City.

The deal would combine Hudson City’s retail network with M&T Bank’s full service commercial banking suite and help expand the premier community banking franchise in eastern U.S. Hence, shareholders can benefit from the enhanced scale of business of the combined entity.

Hudson City currently carries a Zacks Rank #3 (Hold). Some other well-placed stocks in this sector that are worth considering include Meta Financial Group, Inc. (CASH - Snapshot Report) and OceanFirst Financial Corp. (OCFC - Snapshot Report). Both these stocks carry a Zacks Rank #1 (Strong Buy).

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